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KPMG FLASH NEWSKPMG IN INDIA

SEBI revises requirements in relation to Schemes of Arrangement underCompanies Act

6 February 2013

BackgroundRule 19(2)(b) of the Securities Contract (Regulation)Rules, 1957 (SCRR) requires that a public companyseeking listing of its shares shall offer and allot topublic at least 25 percent of the post-issue capital topublic.

Rule 19(7) of SCRR empowers the Securities andExchange Board of India (SEBI) to allow relaxation

from compliance with any of the requirement underRule 19 of the SCRR.

SEBI had issued Circular 1 (erstwhile Circular)prescribing certain conditions to be fulfilled by unlistedcompanies seeking listing of its shares issuedpursuant to a Scheme of Arrangement sanctioned bythe High Court for seeking exemption under Rule19(7) of the SCRR from strict enforcement of Rule19(2)(b) of SCRR. The Circular was issued to theStock Exchanges for considering the same whilemaking recommendations on application received bythem.

____________1 Circular No. SEBI/CFD/SCRR/01/2009/03/09, 3 September 2009

The SEBI has now issued a Circular 2 (the Circular),revising existing requirements, as the existing Circularwas not addressing certain specific types of situationsincluding inadequate disclosures, convoluted Schemesof Arrangement, exaggerated valuations, etc. TheCircular repeals the erstwhile Circular except that it willcontinue to operate in cases where the Scheme is

already submitted to the High Court on the date of theCircular.

Summary of key revised requirements are asunder:

I. Requirements before the Scheme issubmitted for sanction by the High Court

• The Draft Scheme to provide for obtaining ofshareholders’ approval through special resolutionpassed by way of postal ballot and e-voting.

___________2 Circular No. SEBI/CFD/DIL/5/2013 dated 4 February 2013

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• The Draft Scheme to provide that the specialresolution should be acted upon only if 2/3rd ofvotes cast by public shareholders are “in favor” ofthe proposal.

•

Listed Company to obtain report from its AuditCommittee recommending the Draft Scheme aftertaking into consideration, inter alia, the valuationreport obtained from independent Chartered

Accountant.

• Listed Company shall submit following documents tothe Stock Exchanges along with the Draft Schemerequired to be filed under Clause 24(f) of the Listing

Agreement

Valuation Report from Independent Chartered Accountant;

Audit Committee Report referred in (b) above

Fairness opinion by merchant banker;

Pre and post amalgamation shareholdingpattern of unlisted company;

Audited financials of last 3 years (financials notbeing more than 6 months old) of unlistedcompany;

Compliance with Clause 49 of Listing Agreement; and

Complaints Report as per Annexure II of thiscircular.

• The Listed Company and stock exchanges todisclose the Draft Scheme and other documents in(d) above on their respective websites.

• Listed Company to choose one of the stockexchanges having nation-wide trading terminals forthe purpose of coordinating with SEBI.

• The Designated Stock Exchange to forward theDraft Scheme along with the prescribed set ofdocuments to SEBI within 3 working days.

• The stock exchanges to forward their 'Objection /No-Objection' letter to the SEBI within 30 days fromthe date of application or within 7 days of date ofreceipt of satisfactory reply on clarifications from thecompany and/or opinion from independent

Chartered Accountant, if any sought by stockexchanges.

• SEBI to provide comments on Draft Scheme, afterreceipt of “Objection/No-Objection” letter fromstock exchanges, post seeking clarifications fromany person including the listed company or thestock exchanges and opinion from independent

Chartered Accountant.

• SEBI to provide its comments on the DraftScheme to the stock exchanges within 30 daysfrom date of :

Receipt of Reply from the Company or

Receipt of opinion from independentChartered Accountant or

Receipt of “Objection/No-Objection” letter

from stock exchanges

• The Listed company to comply with the Redressalmechanism for Complains on the Draft Schemeand submit a report in prescribed format to thestock exchanges.

• Stock exchanges shall issue Observation Letter tothe listed companies within 7 days of receipt ofcomments from SEBI. Observation letter issuedby the stock exchanges shall be valid for 6 monthsfrom the date of issuance.

• Listed companies shall include ‘ObservationLetter’ of the stock exchanges and ‘ComplaintsReport’ in the notice sent to the shareholdersseeking approval of the Scheme and the sameshall be also brought to the notice of the HighCourt at the time of seeking approval of theScheme.

• The Listed Company and stock exchanges todisclose the Observation letter on their respectivewebsites.

II. Requirement after the Scheme issanctioned by the High Court

Upon sanction of the Scheme by the High Court:

• Unlisted company is required to make anapplication to the SEBI under Rule 19(7) ofSCRR for seeking relaxation under Rule 19(2)(b)of SCRR if following significant conditions aresatisfied :

The equity shares sought to be listed have

been allotted to the holders of securities of alisted transferor entity in terms of the Schemesanctioned by the High Court;

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At least twenty five percent of the post Schemepaid-up capital, computed in prescribed manner,is allotted to public shareholders of the listedtransferor entity;

The share certificates have been dispatched tothe allottees pursuant to the Scheme or theirnames have been entered as beneficial ownerin the records of the depositories.

• Listed companies shall submit required documentsto the stock exchanges and stock exchanges in turnshall forward the same to the SEBI.

• Lock-in and certain other requirements continue tobe the same as existing.

Appli cab ili ty

It applies to listed companies which have not filed theScheme with the High Court on the date of this Circular.It shall apply to such Schemes even if the same wasalready approved by / submitted for approval to theStock exchange and will have to be resubmitted

Our comments

The Circular is aimed at bringing in more transparencyand to safeguard the interests of minority shareholdersin case of companies claiming relaxation under Rule19(2)(b) of SCRR. A plain reading of certain portion ofthe Circular creates an impression that it applies to allSchemes, involving a listed company not requiringrelaxation under Rule 19(2)(b) of SCRR. However, it ispertinent to note that the Circular is issued underSection 11 /11A of the SEBI Act read with Rule 19(7) ofSCRR which operates only in case exemption /relaxation is claimed thereunder. Therefore, the Circularshould be applicable only to cases involving issue ofshares proposed to be listed and exemption is soughtunder Rule 19(7) of SCRR and not in case of otherSchemes not claiming any exemption under Rule 19(7)of SCRR.

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although weendeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continueto be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

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